At a time when the auto industry has been hit by high interest rates, rising inflation and reduced margins, Reliance Retail Ltd is expanding its fledgling used cars business and has started scouting for land.
The Mukesh Ambani-controlled company launched its first used-car store, Reliance AutoZone, in January in Jamnagar city, Gujarat, where its parent Reliance Industries Ltd has a petroleum refinery. “We are now looking at possible sites in Maharashtra and the NCR (national capital region) to open stores in the next three months,” said a Reliance official, who did not want to be identified.
A questionnaire sent to the company on Friday was not answered.
The company has started testing the waters in and around Mumbai, but is yet to open a store in the city. It first tested its business model on its employees at the Reliance Corporate Park in Navi Mumbai before selling used cars in makeshift centres elsewhere.
The business model, which Reliance hopes will set it apart from competitors, will see AutoZone selling accessories and parts besides used cars, and providing repair and servicing facilities as well. With AutoZone, Reliance joins a list of vehicle makers such as Maruti Suzuki India Ltd, Honda Siel Cars India Ltd, Hyundai Motor India Ltd, Ford India Pvt. Ltd and Mahindra and Mahindra Ltd that run used-car operations as well, attracted by higher margins in the segment.
The used-car market was estimated to be about 10 per cent more than that of new cars in fiscal 2007, according to projections by Maruti’s TrueValue and Honda’s Auto Terrace used-car divisions. Indians, flush with rising salaries in a fast growing economy, bought 1.4 million new cars last year.
But, the sheen in the used-car space has started to wear off. According to industry estimates, with more players entering the business, margins have narrowed to about 10 per cent from 20 per cent seven years ago. Also, the Union Budget for 2008-09 cut excise duty on small cars by 4 per cent, leading to a further decline in used car prices.
“If they’re (Reliance) looking to make profits, it’s going to take a while,” said Aarif Fazulbhoy, director of Fazulbhoy Motors Pvt. Ltd, a private player that sells about 100 used cars every month. “Margins on used cars are expected to come down to the levels of margins in the new cars space over the next three years.”
The margins for new cars are in the range of 1-2 per cent. Some players in the market warn that it’s not going to be a walk in the park for Reliance, as it will be a challenge to source reasonably good used cars at the right price as well as spares to refurbish these cars. “A non-car making entity will have trouble getting spare parts to refurbish the vehicles,” said Sunil Gambhir, head, Auto Terrace.
Reliance AutoZone joins Mahindra First Choice Ltd, started by the Mahindra group, as the only second organised used-car retailer to offer all brands under its roof, and the first non-car manufacturer to enter the business in the organised space.
Organised players such as these make up a mere 13-14 per cent of the entire used-car retailer market. The rest is dominated by private firms such as Fazulbhoy Motors and smaller outfits that likely sell just five cars a month.
Some market experts say the entry of more organised players could, in the long run, lead to a healthy growth in used-cars retail. As the market becomes more organised, consumers will benefit from a wider choice of certified used cars at better prices.
“We expect a CAGR (compounded annual growth rate) of 20-22% by 2011-12,” said Ravi Bhatia, chief general manager of sales support at Maruti’s TrueValue division, the biggest organised used-car seller in the country.
Reliance Autozone chief executive Arun Dey had said in January that the firm plans to open up to 400 stores nationwide in three-four years.